In past six trading sessions, Nifty PSU Bank index rallied 10% from levels of 3,543 on January 16, 2018, after the government curtailed its additional market borrowing programme as it expects more transfers of surplus cash from the Reserve Bank in the current fiscal ending March 31. On comparison, Nifty 50 index was gain 3.6% during the period.

In October 2017, the government unveiled a Rs 2.1 trillion support for PSBs, struggling with mounting bad loans, in order to spur “genuine” infrastructure lending for upcoming mega projects. CLICK HERE TO READ FULL REPORT.

Analyst at Systematix Institutional Equities believe the capital allocation will translate into a significant divergence in operating and return ratios, which are vital as banks’ valuation now mirrors them.

“Our analysis indicates a higher capital allocation could drive earnings upgrade of 30%+ for SBI and sensitivity of credit cost to RoAs are also high for other banks. Also, the capital allocation could come with covenants on lending and gradually driving some smaller banks to a differentiated banking or mergers. Hence, we continue to be selective and prefer banks with lower net stress loans and capital needs”, the brokerage firm said in recent report on state-owned banks.